No matter your age, professional level, or income-earning capacity, it’s always an advantage to be smart with your finances. This means putting all your payables in order, one of the many being your taxes.
If you’re an earning individual, paying your taxes is an inevitable part of life. There may be some areas wherein you can save on the tax payable or even have an exemption. However, every year, there’s no escaping your taxes. Even for less traditional investments, you still have to make this contribution—with cryptocurrency taxes, for instance.
As unpleasant as it feels to see a huge chunk of your hard-earned money go towards the payment of your taxes, there are strategies that you can use. These include the following:
1) Max Out Your Health Savings Account
Apart from your retirement savings, perhaps you also have what’s known as a health savings account. Similar to what you’d do with your retirement account, it’s a good idea also to max out your health savings account.
This refers to the account that you’ve allocated to set aside funds for any medical expenses that you may need to cover. Especially if you’re covering deductibles for your dependents, then you might also be eligible for tax deductions or exemptions.
The amount or percentage will depend on your monthly contribution, income, and the number of dependents, among other factors. If there’s anything that you’re unsure of, consult your bookkeeper, accountant, or even online software like Digital Honey. These resources can help you manage your accounts and tax payables annually.
2) Donate Appreciated Securities
If you’ve got appreciated securities, then this tip will resonate well with you. To reduce your taxable income for 2021, you may want to consider donating those appreciated securities. You can give it to charity in what would be known as a donor-advised fund in your account.
When you do this, the deduction will generally be around the fair value of the asset that you’ve donated, with a limit of up to 30% of your total adjusted gross income.
This deduction on the donation is possible because you shouldn’t have to pay any more capital gains tax on assets that are already fully appreciated.
3) Max Out Retirement Plan Contributions
If you haven’t been paying the maximum for your retirement plan contributions, then it’ll also be a good idea to do it this year. When you do so, you’re essentially hitting two birds with one stone. First, you’re able to secure your retirement early by paying as much as you can. Second, you’re also reducing your tax payment liability.
The general rule that applies is this: the more money that you put towards your retirement contribution, the less tax you’re going to have to pay.
4) Consider Giving Yourself A Bonus
This third tip is a strategy for business owners. Even when your profits are high enough for you to be confident that you deserve a higher monthly ‘salary’, don’t increase your salary. Keep it at its current rate. What you can do instead is to give yourself a bonus. Issue a check or withdraw a certain amount from your business or corporate account and deposit it into your personal account as your bonus.
When you do this, that amount doesn’t become taxable as it’s not your wage. You can consider it merely as a bank transfer from your business account to your personal one. Of course, once that amount reaches your personal account, it’ll already be the bank that makes the minimal deduction for tax liability that it has to shoulder.
5) Move To A Low-Tax State
If you’ve long been considering relocating your company to another state or country, consider choosing places that are identified as low-tax.
Of course, this is subjective, since your point of reference is the rate you’re currently paying for. Moving away in 2021 may seem like a bold decision to make. But, in the long run, if it means better career opportunities and more stable finances, then it’s a worthwhile decision.
With the tips above, you can now save money on your taxes without doing anything illegal. It may be ideal to pay less in taxes, but you should skip paying taxes altogether. As you can see from the suggestions above, it’s simply about being strategic about your payments. Even as a seasoned taxpayer, it’s normal to still be at a loss at how to go about your taxes. If any of the tips above still seem confusing for you, you can always seek the help of expert accountants. That way, you know that you’re employing the best tax reduction strategies without getting in trouble with the law.